Court of Appeal Brings Clarity to Termination Clauses

March 2017

The Ontario Court of Appeal has just released a significant decision regarding the interpretation of termination clauses in employment contracts. The decision in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (“Wood”) reaffirms that courts in Ontario will take a strict approach to interpreting these clauses and even potential inconsistencies with the Employment Standards Act (the “ESA”) will be sufficient to invalidate a clause. This is particularly important given that several recent Ontario cases had given hope to employers that a more lenient approach was being applied. With Wood, any suggestion of leniency seems to have been quashed.

The Facts

Julia Wood had worked for Fred Deeley Imports Ltd. (“Deeley”) for just over eight years at the time of her termination. The termination clause in her employment agreement read as follows:

The Company is entitled to terminate your employment at any time without cause by providing you with 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph …. The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

On termination, Deeley provided Wood with 13 weeks’ working notice, followed by a lump sum equal to 8 weeks’ pay. Deeley also continued Wood’s group benefits for 13 weeks. This satisfied, and indeed was greater than, Wood’s entitlements under the ESA, and was consistent with her contractual entitlements. Wood nonetheless sued Deeley for wrongful dismissal, alleging that the termination clause was unenforceable for being contrary to the ESA.

Wood argued that the clause excluded Deeley’s statutory obligation to contribute to her benefit plans during the notice period and did not clearly require Deeley to pay severance pay upon termination.

The Superior Court found that the clause in question was enforceable and that Wood had received her ESA and contractual entitlements. On appeal, the Court of Appeal overturned the Superior Court’s decision and held that the termination clause contravened the ESA and was unenforceable.

The Court of Appeal’s Decision

First, the Court found the termination clause excluded Deeley’s obligation to contribute to Wood’s benefit plan during the ESA notice period. The Court noted:

The word “pay” in the termination clause was not broad enough to include both salary and benefits.

Deeley’s contributions to Wood’s benefit plans through the entirety of the ESA notice period had no bearing on whether the termination clause itself contravened the ESA. The wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA.

Second, the Court noted that the clause did not satisfy Deeley’s statutory obligation to pay severance pay. “Notice of termination”, or “pay in lieu thereof”, and “severance pay” are separate obligations under the Ontario ESA. The clause in question had combined these separate obligations, and could be interpreted in a way that allowed Deeley to avoid paying severance pay.

The Court noted that although the clause in question had several possible interpretations, one of which was compliant with the ESA, and that Deeley had complied with the ESA upon Wood’s termination, this did not change the fact that the clause, as drafted, was unenforceable. Deeley’s actions subsequent to termination were not capable of remedying the defective termination clause. Put another way, the fact that the clause could be interpreted and applied in a way that was not compliant with the ESA, was sufficient to invalidate the clause.

As a result of the invalid termination clause, the employment contract did not rebut the presumption that Wood was entitled to reasonable notice, and she was entitled to a notice period of 39 weeks rather than the 21 weeks she had received.

Lessons for Employers

Several recent decisions in Ontario had given employers hope that the courts were moving away from strictly interpreting termination clauses and were upholding termination clauses that could be applied in a manner that was contrary to the ESA but were applied in a compliant manner. The most notable of these recent decisions is Oudin v. Centre Francophone de Toronto, 2016 ONCA 514. In that case the termination clause at issue did not reference benefits or severance pay and was upheld with very brief reasons by the Court of Appeal. Somewhat surprisingly, the Court in Wood did not mention its earlier decision in Oudin.

Nonetheless, given the in-depth consideration of the issue in Wood, and the very clear direction from the Court, it is likely that courts in Ontario will return to a very strict interpretation of termination clauses in employment contracts. If a clause can be interpreted in a manner that is not compliant with the ESA then the risk is that it will be unenforceable, regardless of how the employer ultimately applies it. It is clear from Wood that an employer’s conduct post-termination cannot rectify an invalid termination clause.

In light of this decision, employers should ensure that any termination clauses in their employment contracts are fully compliant with the ESA. This can be challenging where the termination clause offers entitlements that are greater than the minimum statutory entitlements, as was the case in Wood. In Ontario, this means that the clause must deal with (1) working notice or pay in lieu thereof, (2) severance pay and (3) benefit continuation.